Specific Objectives of the Project: The objectives of this project are to

1. Create an evidence based and detailed primer that characterizes supply and demand in the underlying market reflected by California’s Veles spot market water index (NQH20).
2. Use time series econometric methods to identify the determinants of spot water prices in the Veles water market.

Summary of Results:
Preliminary results provide the following facts about the market for water in California:

1. 82% of water trades are one-year leases, meaning that they are a temporary transfer of the right to extract either surface or groundwater that last for one year only. All the following stylized facts only apply in the market for one-year leases.
2. Most short-term water trades happen in the groundwater market, but most of the volume is traded in the surface water market. 75% of one-year leases are for groundwater in adjudicated basins, but these only represent 25% of the total volume traded.
3. The market for surface water responds to drought conditions, but the market for groundwater does not. Prices, price volatility, total volume traded, and number of trades increase in response to drought in the market for surface water but remains consistent in the market for groundwater.
4. In the groundwater market, virtually all transactions happen in May, and the price is constant over time at around $200. The limited number of transactions that take place during other times of the year generally have a higher price, and the price trends upward over time. Seasonality is also present in the surface water market, but it is less pronounced and less important.
5. Beyond seasonality, most of the price variation in the groundwater market comes from differences in location, specifically subbasin. Location and month fixed effects control for 92% of the variation in price for groundwater.
6. In contrast, most of the price variation comes over time in the market for surface water. During times of drought surface water prices can be five times higher than when there is no drought or less severe drought. In fact, during some months of the year when there is no drought the price of surface water can be close to zero. This wide range of prices reflects the dependence of the surface water market on drought conditions.

Specific Objectives of the Project:
The objective of this proposal is to isolate the effect of droughts and heat on access to drinking water and drinking water quality in rural agricultural communities in the San Joaquin Valley.

Summary of Results:
A first preliminary result indicates that farmers are responding to heat and surface water scarcity through the construction of groundwater wells. We estimate that for each acre foot (AF) of reduced surface water allocations for agriculture, the annual rate of agricultural well construction increases by 46%. Using an approximated cost of $75,000 to construct an agricultural well, this translates to a back-of-the-envelope $37 million dollars invested annually in extensive-margin adaptation behavior by California farmers. Our finding that extreme heat will increase groundwater extraction brings a new data point to our understanding of how climate change will influence water resources. Our results highlight that even if water supplies remain unchanged, warmer temperatures will increase demand for groundwater, with an additional harmful degree day increasing well construction by 1.2%.

A second set of preliminary results indicates that extreme heat and reductions in agricultural surface water supplies lower the depth to the groundwater table. A 1-AF of reduced agricultural surface water allocation to every California cropland acre, lowers local groundwater levels by an additional 4 feet. An additional harmful degree day reduces groundwater levels by 0.5 inches. Declining water tables suggest that the costs of climate change may be larger in the long-run if farmers cannot avail themselves on groundwater resources.

Extreme heat and surface water scarcity also lead to domestic well failures, with a 1 AF decrease in surface water supplies and an extra HDD increasing failures by 5 and 0.2 percentage points, respectively. These results are consistent with a theoretical framework and computational hydrology model in which increased groundwater consumption among agricultural users comes at the cost of drinking water supplies through the channel of a declining water table.

Specific Objectives of the Project
The objectives of this proposal are to empirically estimate the effect of the legalization of cannabis cultivation on agricultural labor, agricultural land prices, agricultural land use and water quality in California.

Summary of Results
Funding from the Giannini Foundation allowed us to begin to assemble a panel dataset comprised of satellite imagery data at a 30mx30m for agricultural land parcels in Humboldt and Mendocino counties spanning the years 1995 to 2020. We also constructed data on the cannabis laws in each county of California, including activities that are permitted and the date that these laws took effect. In our next stage of research, we will designate water bodies, forested land, roads and cannabis using a machine learning approach.

Specific Objectives of the Project
California’s Sustainable Groundwater Management Act (SGMA) requires local management of groundwater throughout the state. To inform water policy, this project sought to identify the impacts of groundwater restrictions on irrigated agriculture and evaluate the effectiveness of economic instruments for management. We used well-level panel data on groundwater extraction and prices from a basin in Southern California to estimate a price elasticity of demand for groundwater. Our objective was to compare welfare across policy instruments with a model that reflects the institutional realities of agriculture in California.

Project Report/Summary of Results
With the passing of SGMA, groundwater management is at the forefront of water policy debates in California. Since groundwater management will have impacts on agriculture, attention must be given to the choice of policy instrument. Our research quantifies the efficiency gains from using market-based instruments relative to command and control to manage groundwater.

A theoretical model of a groundwater market was developed to show how the magnitude and distribution of the gains from trade change as market structure varies. Market structure is a key consideration because future groundwater markets will likely be spatially isolated and the concentration of permits among a handful of buyers and sellers is likely. The exercise of market power may be a defining component of these markets due to the presence of large grower-shippers, the formation of coalitions among buyers or sellers, and/or competition among a few water agencies on a shared basin.

We find that the gains from markets are large, despite potential losses from market power. Economic surplus with trade can be over two times greater than that under command and control. The price elasticity parameter used to calibrate the model was generated with well-level panel data on groundwater extraction and prices from the Coachella Valley, CA. Simulations that vary market conditions show that results generalize to other groundwater basins.

Specific Objectives
To uncover long-term trends in the farm labor supply from rural Mexico and their implications for California farms and rural communities. This project has two components. The first is to continue our work “unpacking” a negative trend in the farm labor supply, which we identified using panel econometric methods with support from a Giannini Minigrant in 2013-14, and explore the implications for specific California crops, by integrating labor into a detailed crop production model. We will estimate the relative contributions of developments in Mexico, including the expansion of rural education and nonfarm economic growth; US border enforcement; drug-related violence along the US-Mexico border; and sector- and location-specific migration networks in explaining the significant decline in rural Mexicans’ probability of doing farm work. We will simulate the implications of this decreasing farm labor supply on specific crops (in collaboration with Richard Howitt and Josue Medellin). The second component (with Katrina Jessoe) will expand work initiated in 2013 on the impacts of weather shocks on labor allocations in rural Mexico, including migration to the US. Our early findings already have been presented at several conferences and workshops. They indicate that an increase in harmful degree days in rural Mexico, particularly at the start of the maize-growing season, negatively impacts both farm and nonfarm employment and increases emigration pressures. Both components will be the basis for constructing long-term projections of changes in the supply of farm labor to Mexican and US farms, the implications for California agriculture, and the role of immigration policy in an era of less abundant farm labor.

Summary of Results
Charlton (2014) and Charlton and Taylor (2015). They were presented at the UC Davis “Frontiers of Immigration International Conference” on January 22, 2015, and they appeared in The Wall Street Journal the following day. They also have been presented to grower and farm labor conferences, including the 2015 Oregon Wine Symposium, the Harvard University Farm Labor Challenges conference (November 2014), the “Farm Labor and the ALRA at 40” conference (2015), and the Banco de Mexico (2014).

In a related study (Jessoe, Manning, and Taylor), we find evidence that rural Mexicans are less likely to work locally in years with a high occurrence of extreme heat. This reduction is largely due to a decline in non-farm labor and wage work. Extreme heat increases migration within Mexico from rural to urban areas, particularly at the height of the growing season, and international migration to the U.S. Findings from this study were presented at the Agricultural & Applied Economics Association’s 2014 AAEA Annual Meeting in Minneapolis, and the Fifth World Congress of Environmental and Resource Economists.

This research focused on three water pricing policies introduced by the city of Davis between 1996 and 2006: a switch from a uniform to an increasing block pricing structure; the introduction of a second block for single family residential households; and a change in the sewer rate structure. Our results indicate that each policy led to water conservation and suggest that a doubling of prices would on average reduce consumption by 12%.